GCC: Can they launch the khaleeji as planned?

It was in 1981 when countries bordering the Persian Gulf formed a coalition that shares a common ground in relation to economy, finance, trade, customs, tourism, legislation, and administration. Thus, came the Gulf Cooperation Council (GCC). Among their major objective is to establish a common currency by the year 2010.

Members of the GCC include United Arab Emirates (UAE), Saudi Arabia, Oman, Kuwait, Qatar and Bahrain. Recently, news surfaced that United Arab Emirates made a decision to withdraw from the formation of a monetary union project after it was announced that the central bank for the monetary union would be located in Riyadh.  It has been said that United Arab Emirates will only re-embrace the common Gulf currency if conditions change in such a way that it pays host to the Gulf central bank. Prior to UAE’s withdrawal from it, Oman had already backed out of the common currency plan in 2007.

The proposed single currency khaleeji which means “of the Gulf” in Arabic has been rumored to be backed by gold. It has also been stated that if the council’s plan pushes through, the GCC monetary union would be the second most important supranational monetary union in the world in terms of GDP and population, after the euro area.

But with the global economic crisis in the sack, plans to launch the khaleeji may be delayed to 2015.

Why do countries seek to form a common currency? Here are some of the benefits of a common currency as written by Paul De Grauwe in his book Economics of Monetary Union:

•          Less transaction costs — Elimination of foreign exchange markets within union eliminates cost of exchanging one currency into another

•          Price transparency –One common unit of account facilitates price comparisons. Consumers “shop around” more and competition increases.

After ten years since its introduction into the market, European Union’s euro has come a long way. It is now the second largest reserve currency and the second most traded currency in the world. Perhaps, the members of the GCC aim for the khaleeji to do the same. Soon, all of their products including the highly needed oil will have to be bought in khaleeji. This would place the dollar in critical condition.

Forex Trading Course